Zai Lab Limited (ZLAB) Earnings Call Transcript & Summary

[Audio Gap] conference. My name is Anupam Rama. I'm one of the senior biotech analysts here at JPMorgan. I'm joined by Matt Bannon and Tessa Romero from the team. Our next presenting company is Zai Lab and presenting on behalf of the company, we have CEO Samantha Du. Before I turn it over to Samantha, I just wanted to highlight to everyone listening on the webcast, if you'd like to submit a question, please use the Ask the Question feature in the portal, and I'm happy to ask the question on your behalf. With that, I'll turn it over to Samantha.

Thank you, Anupam, for your introduction, and thanks JPM for hosting us today. Good morning, everyone, and thank you for attending Zai Lab session today. We appreciate your interest in Zai Lab and hope you and your loved ones are healthy and doing well in 2021. Slide #2 is our safe harbor slide, which I won't burden you with all the details. Now let's turn to Slide #3, please. In Slide #3, I'd like to start by sharing some recent exciting news that should extend our momentum into the new year. Over the last 2 weeks, we announced 3 new strategic collaborations to bolster our product platform and to strengthen our existing portfolio and stronghold in oncology and autoimmune diseases in China. Last week, we announced that we have entered into a strategic collaboration with argenx for the development and commercialization of Efgartigimod in Greater China. This collaboration expands our -- expands and strengthens our autoimmune disease franchise. Efgartigimod is in a registrational stage potential first best-in-class therapy that is being evaluated in the broad range of severe autoimmune diseases. The unmet medical need in these areas in China are severe, and there are very limited treatment options available today. Just this week, we also announced an expanded collaboration with our existing partner, Turning Point for development and commercialization of TPX-0022 in Greater China. TPX-0022 is an inhibitor of MET CSF1R and SRC kinases. Initial data showed evidence of both objective responses across multiple disease types, including but not limited to, gastric and lung cancers with a tolerable safety profile as well. In China, there is a higher incidence of MET-driven cancers, particularly in lung and gastric cancers, and we believe TPX-0022 could be highly synergistic with our existing profile, portfolios and also both in oncology and in gastric and also in lung cancers. We plan to join the global pivotal trials for TPX-0022 by enrolling Chinese patients to not only to help accelerate global development, but also accelerate the China registration. In late December, we announced the strategic collaboration with Cullinan Oncology for CLN-081, a potential best-in-class EGFR inhibitor, targeting exon 20 insertion mutations. Zai will support global development for CLN-081, and we will lead development, commercialization and also manufacturing in Greater China. There are currently no targeted therapies approved for non-small cell lung cancer patients with EGFR exon 20 insertion mutations and approved therapies targeting only EGFR have demonstrated very limited efficacy in this patient population. EGFR mutation rates in China are among the highest in the world and exon 20 insertion mutations are the most prevalent mutations globally after the EGFR mutations. So the opportunity is large for the Chinese population. In summary, we're excited by the value we have been able to bring to Zai Lab with each of these collaborations and out to our shareholders and to patients. We also, as we announced early in the year, we had started collaboration with Regeneron. Each of these products have the potential to be first or only in class categories. Not only do they address any indications with important unmet medical needs in China globally, but each is highly synergistic with our interesting portfolio. We look forward to working closely with each of our partners to quickly bring these assets through their respective value inflection points. Turning to Slide #4, please. Now let me give you a recap of 2022 -- 2020. Despite the global pandemic, this was a year of remarkable progress and execution for Zai. We entered into the important strategic partnerships with the high-quality compounds. The companies like you see on the upper left side of the slide. Year in and year out, we continue to collaborate with partners working on significant scientific breakthroughs to drive important and unmet medical needs. Our deep drug development capabilities and scientific insights, are real advantages in our business development efforts. In terms of commercialization, we successfully launched ZEJULA for second and first-line ovarian cancers and Optune for GBM in China, even during the most severe period of the COVID-19 result in China. In 2020, we were successful in getting ZEJULA also included in NRDL in China in the same year it was launched. On the regulatory front, we were also very fortunate to register and file QINLOCK and NUZYRA in China, and both NDAs have been granted priority reviews subsequently. And of course, there were exciting developments on the clinical and regulatory fronts. Our partner MacroGenics gained approval for the margetuximab in HER2 positive breast cancer. Five Prime reported positive top line results for bema with the inclusion of Chinese patients that Zai Lab have recruited. These events were important for our progress in advancing these programs in China. In addition, we began clinical development of 2 internally developed assets with global rights. All of these activities were supported by the strengthening of our capital position and operations, including our reaching nearly $1.2 billion capital. We also beefed up our organization, both by bringing highly experienced, talented people across all levels of the organization and also expanded our global footprint. Let's turn to Slide #5, please. Now let me give you a quick overview of Zai Lab today. In just 6 years since inception, we have built the portfolio of 20 products, including 10 later stage clinical development that 5 have already been approved in the U.S. and 2 products ZEJULA and Optune have successfully launched in Greater China last year. Two others, QINLOCK and NUZYRA, we expect to launch them this year. We remain focused on 3 therapeutic areas: oncology, autoimmune and also infectious diseases. Within oncology, we have concentrated our efforts on 5 strong disease hosts that represent over 50% of all cancer cases in China. Recently, we have substantially expanded our presence in gastric lung cancers by adding more programs into our portfolio. And we have developed an internal pipeline of 7 compounds to which we have global rights. Turning to Slide 6, please. Our success depends on truly innovative products, and here is our current pipeline. What makes Zai Lab distinctive is not just the number of products we are developing, but the quality of those products and our ability to execute with speed and quality and advancing these products at the same time. What is also unique is the validated nature of our growth and innovative pipeline. Overall, these products have either progressed into the advanced development phases or have been launched on a global basis or in China. In addition, we have 7 internally developed candidates with global rights. Even though they are in earlier stage, they offer considerable upside potential for shareholders and patients globally. Now let's turn to Slide #7, please. Another unique feature of Zai Lab is the level of visibility. We have, in terms of scaling -- which we have in terms of scaling up. This year, we are intent on achieving commercial success for ZEJULA and Optune as well as for the potential launch of QINLOCK and also NUZYRA. This is the first full year of revenues for ZEJULA and Optune, and also the first year of ZEJULA on the NRDL. The next wave of over 10 additional China launches in multiple diseases is already visible, as you can see from this slide. And beyond that, we aim to develop and advance new assets through business development as well as proprietary combination product portfolios and internally developed products with global rights. We do believe this pipeline offers not only near-term but also medium and long-term opportunities for value creation. Turn to Slide #8, please. We have built this wave of future launches from a steady stream of product licensing, both vertically and horizontally. Our track record of consistently being potential first, best or only-in-class assets is second to none. Zai's reputation as an industry leader in this field falls through many years of successful pipeline expansion, our deep scientific and R&D experience, our execution speed and quality in our development and in discovery, our drive for global excellence, our global minded entrepreneurial culture and more recently, our expanding commercial footprint in Greater China. Because of our scientific knowledge and insights and because of all the elements I have mentioned, we have a long track record of licensing products at earlier stage that later achieve approvals or reach major clinical milestones. Therefore, our value proposition to strategic partners in the global pharma community and to you as investors and existing shareholders is compelling, unique and substantial for the long run. Please turn to Slide #9, which focuses on our internal development pipeline with global IP rights, as I mentioned earlier. While we are better known for our in-licensing achievements, we have been investing in our internal capabilities in drug discovery and development for the last 4 years. Here, you can see a summary of our in-house development pipeline. And in last summer, we moved 2 -- first 2 of these compounds into clinics, even during COVID. We have now added a third Phase I compound, ZL-2309, a potential first and best-in-class CDC7 inhibitor. Existing preclinical data suggests that this MOA represents a key role in the DNA repair pathway, which is an area of focus within Zai building on our existing experience with a PARP inhibitor. Going forward, we plan to add to this internal pipeline with at least one new IND per year. Next slide, please. On Slide #10, I would like to highlight again our strong therapeutic area of focus that we had built up over the last few years. We have carefully beefed up our portfolio, both horizontally and vertically around 3 therapeutic areas, with high unmet medical needs in China and worldwide. In oncology, we have focused on 5 strong disease holds that represent over half of new cancer cases, new incidences in China: women's cancer, GI, lung and brain cancers and hematological malignancies. Autoimmune disorder represents more than $100 billion market worldwide. We expect Efgartigimod and ZL-1102 to become anchor assets in our growing autoimmune franchise. The [indiscernible] (00:30:16) effective marketplace in China and around the world suffer from a lack of new products. By focusing on these large unmet medical needs, we expect to drive synergy, not only during clinical development and commercialization stage, but also in expanding our proprietary knowledge base and our network. In the next 3 slides, I'll cover 3 disease strongholds that will strengthen [indiscernible] (00:30:52) 2020. Now let's turn to Slide 11, please. In this slide, I'd like to draw your attention to GI cancer. It's the second most common cancer in China, with over 680,000 new cases per year and is the second leading cause of death. We have built a comprehensive portfolio of product candidates in this area in just over 3 years. We believe we have one of the most formidable gastric cancer pipelines in the world today. We offer treatment options that cover a range of mutations. And on top of that, we also have TT fields and immunotherapies. Together, they offer not only individual product proper evaluation, but also as a combo, they offer tremendous opportunity to expand our pipeline. Now let's see our next slide, which covers lung cancer. Slide #12. Lung cancer is the most common cancer type with over 730,000 new cases per year in China alone, and is the leading cancer of death in China with 5-year level of less than 20%. We have established leadership in precision medicine with a portfolio of lung cancer products, which harbors a broad range of mutational. And on top of that, we have also used TT fields and autoimmune therapies. Again, together, they offer combination opportunities for further expansion of our existing pipeline. Now let's turn to Slide #13, please. In autoimmune disease, we believe that Efgartigimod is a potential first and best-in-class therapy that offers true pipeline in a product opportunity. Again, let me highlight, this is a pipeline in a product opportunity. It will mentor and strengthen our franchise, along with our internal candidate ZL-1102. There are almost 0.5 million patients in China, suffering from these 4 diseases for which Efgartigimod is being tested. As I mentioned earlier, there are few treatment options available today, with no innovative therapy in severe autoimmune diseases. We will recruit Chinese patients into argenx' global registrational trials and also with additional potentially 10 indications. Turn to Slide 14, please. 2020 (sic) [ 2021 ] will be the year when we continue to demonstrate our commercial execution with 2 products in their first full year of launch, and also one of them included in NRDL already. Particularly, it was included within a year of launch -- the first year of launch. We successfully launched ZEJULA at the end of January -- we had successful launched ZEJULA at end of January 2020 during the midst of COVID breakout. It's the only PARP inhibitor approved in monotherapy for ovarian cancer patients in the first-line and recurring maintenance treatment settings regardless of biomarker status. The inclusion of Zai NRDL this year, we improved its access and affordability for patients around -- across China for ovarian cancer and also potentially beyond in the following years. In the meantime, we have achieved substantial hospital coverage as well as reimbursement support by commercial and regional government -- the insurance plans this year, as you can see from this upside -- left side of the slide. The launch of Optune is also going very well, even it's the first novel treatment for GBM in China in more than 15 years. Before we launched Optune in China, the only treatments were surgery, radiation and chemo. Optune is the first innovative medical device supported by commercial health care insurance and is also supported by supplemental insurance plans of regional government in China. We are working closely with our partner Novocure to bring this only-in-class treatment options potentially to other cancer types, including pancreatic, ovarian cancer, lung cancer, liver cancer and gastric cancers. In addition, in 2021, we will also launch 2 new products, as I mentioned earlier, QINLOCK and NUZYRA. Our commercial success is supported not only by this differentiated portfolio we have built over the years, but also by our dedicated, experienced team with solid track record of launching commercial oncology products over the last 8 years. Turn to Slide 15, please. By now, we have been expanding our global footprint to accommodate our growth and transition into a leading global biopharma. We currently have over 1,100 employees across 8 major operational sites around the world. Operational scale and position are important. But what is more important is having the right entrepreneurial spirit and a one company, one dream culture. I'm very proud of our employees and their dedication to Zai Lab's mission. Turn to Slide 16, please. This page shows a snapshot of our to-do list in 2021. Among our major goals will be regulatory approval and successful launches of QINLOCK and NUZYRA, to submit NDA for margetuximab for HER2-positive breast cancer, to advance and regulatory discussions for Efgartigimod for FTE and other potential products in China and to report on multiple data readouts not only for TT fields, but also for other products. Of course, we will continue to be active in advancing our entire portfolio through many business developments -- through many internal development milestones and in-house discovery activities, but also in business development, which we have done consistently well over the last 6 years which we'll transitionally deliver. While we are going to invest in our commercial platform and R&D, we will not compromise our quality standards and we also over the near mid- to medium-term have additional 10 products, potentially launching in the near term and medium term. Turning to Slide 17, please. Moving to my last slide. I would like to sum up where we have come from and where we're going. When we founded Zai Lab in 2014, our focus was to bring first- best- and only-in-class assets to Chinese patients faster than the previous gap between the U.S. and China approval of over 7 years. We established ourselves as partner of choice by 2017 when we listed on NASDAQ. At that time, we promised by 2020, we will become a fully integrated biopharma leader in China. We have delivered on that promise, and we executed above and beyond, and by 2023, our mission is to become a leading global pharmaceutical company. In addition to continuing our strategy of bringing steady stream of approvals and launches in China and full transformative partnerships and aim to discover and develop innovative medicines and bring some of them to key value inflection points globally among other initiatives. Turn to Slide #18, please. So with that, I would like to conclude with a picture that captures Zai's spirit. Zai Lab in Chinese means once again reach to the top of the mountain and in anticipating ascending Mount Everest, we have built a very strong foundation over the last 6 years. We're confident -- we are very confidently leading the base camp and entering into a new phase of growth acceleration over the next 3 years. With your support, we are well accepted, energized and committed, and we welcome you to join us on this next exciting journey. Thank you for your time and the interest. Now let me turn the podium over to Anupam.

Thanks Samantha. [Operator Instructions] If we could have Jonathan, Tao and Billy from Zai Lab also join the Q&A session, that would be great. So we have the full management team here. But maybe I'd ask maybe a broader strategic question to start, which is we just saw this autoimmune deal. And when you looked at the pipeline, it's very oncology heavy at the top. And how much more autoimmune sort of BD should we be expecting going forward? And maybe you could give us a sense of the opportunity for autoimmune diseases in China.

That's a very good question. Since I have our Head of Business Development, Jonathan Wang in this panel, I'll turn it over to him to add a lot of pressure to Jonathan.

Thanks for the question, Anupam, and it's great to be here. Look, I think autoimmune is a very diverse therapeutic area, and there are many diseases, which are very severe and often can be deadly. So I think Efgartigimod is really a perfect example of a product which is really a pipeline in a product opportunity that can be indicated or has potential for why variety of these serious autoimmune diseases and many of these are actually very significant patient populations. I mean if you look at MG, that's about 200,000 prevalent patients currently in China, ITP is another 120,000, and the number goes on. So I think there are other products potentially that's similar to Efgartigimod, and that can be complementary to autoimmune franchise. I think whether it's through in-house discovery, whether it's through partnering, if we can help bring these products quicker to the patients, I think that would fit our goal.

Okay. Matt, from the team, I think, was going to hop in with some questions on the business development side as well.

Yes. Just maybe one for Jonathan on that deal. It was kind of interesting, I think we're getting used to seeing the $25 million, $35 million upfront in cash, but this was the first one that was upsized a bit and came in the form of equity. So just wondering if that was deal specific? Or if that's more of a sign of increasing competition for assets in China? Any color there would be really helpful.

Yes. So I think every deal, first of all, is very different. I think if you look at this one, the total milestone payments, I think, is actually significantly less compared to many of our other deals. I think this is a commercial stage asset. So I think the most important metrics are also around sales milestones, which is 0 in this case. And then also royalties, I think royalties is on par with some of these other programs that we have brought in similar stages, really the mid-teens and then sort of tiered upwards to about 20%, sort of staggered up. In terms of the equity, this is the first time we've done it. Argenx and the team there, obviously, believe that the stock has a lot more value or room to grow. So hence, they were really interested in our equity as opposed to getting cash. From a total valuation of the company wise, it's about, I think, 0.6% of the company. So for that in exchange for a great asset, I think that's a great deal for Xi and also for argenx.

And also, let me add on just on top of what Jonathan said. First of all, let's talk about this opportunity. This is the first time pipeline in a product opportunity. And this is a very important autoimmune diseases franchise. It's not -- it doesn't just cover MG, it covers 10 potential new indications across multiple disease areas within autoimmune, and this also acted as Jonathan said, even though it's front-loaded but overall from our NPV model calculation, it's very justified. And also, we'd love to have our partner with a skin in the game together with us. So it's a mutually happy situation to offer a small number of Zai Lab stocks, which we think is beneficial to both -- both of us and potentially also beneficial to our shareholders. Thank you. And again, let me say, we never do a deal, say it's -- you can never play -- or do a deal apple-to-apple comparison. They all have their unique opportunities, and Zai grows -- our deal structures can be creative, can be different, but fundamentally, they will bring value to shareholders and patients globally.

We have an e-mail question in the portal here. Given your guys' recent progress and the potential for multiple approved products, are you considering sort of guidance or EPS targets going forward?

Billy, you're the CFO, please.

Yes. Thanks, Anupam, and thank you for the investor who posed a question. So we're not yet providing guidance. We just launched our 2 products last year. And 2021 will be the first full calendar year for both those products, ZEJULA and Optune. And then, of course, this year, we also have 2 additional launches in the queue. But you're right. I mean we have an unusually high level of visibility on how we're going to scale up, and Samantha presented that slide where it showed that over the near to medium term, we have robust visibility on at least 10 additional launches. So at some point, I think we'll have enough information where we can give a little more color. But still at this time right now, we're very much in investment mode -- fundamental investment mode to what's to come.

We've got another question in the portal, which is given the ZEJULA NRDL placement, at what point do you think you can describe kind of pricing dynamic that was negotiated?

Yes. According to the government confidentiality agreement, it's in March is the disclose.

In March. Okay. We've got another question in the queue here. Given your pipeline, it looks like most of the compounds are mainly aimed at commercializing in Greater China. Are there any plans on expansion into the Middle East type of region?

I love Middle East, and I'd love to enter into that space. But if you look at our programs, our compounds, near-term, majority are focused in Greater China, which is already represents second largest pharma market globally, and it's also on a very fast growth momentum. So this alone for the next near-term and medium-term would be tremendous valuation to us. But you also see we have 7 programs. Some of -- 2 or 3 of them are already under clinical development globally, and they offer global opportunities to patients and to shareholders. And I'm sure Middle East is also high on this either through collaboration through internal expansion. But having said so, I think not only from internal discovery and development efforts, we will gradually calculate it, looking for the right assets we spend, but also, we are committed even there are good assets for acquisition, we will not shy away from that opportunity. But all in all, what I want to say is, over the last 6 years, we have done well in business development just to address Greater China market, but what we have done well, we will continue to do well. We'll continue to deliver. In addition, we'll offer more transformative deals, more internal and also collaborative global assets with the right asset, of course. Thank you for the question.

We've got one more question in the portal before we wrap up here. It's related to some of the deal mechanics related to argenx. But the question is basically, why was there no premium on Zai Lab's stock for argenx to pay? I guess there have been Beijing and Ambien and other types of deals that where there's been a premium?

Well, well, this is different, first of all, from Ambien and also deal and of course, every deal is different. If you look at this clever opportunity, this is really Zai has built a strong foothold in autoimmune diseases through Efgartigimod asset. This is once again is a pipeline in the product opportunity, and this covers multiple disease areas within autoimmune. And as we talk about it, there are potentially 10 other than the 4 already which show the Phase II data. So the opportunity is tremendous. And whether we pay upfront or wait long with sales milestones, we do prefer upfront because at this time I think what we see the opportunity -- tremendous potential opportunities, so we prefer the deal structure. Now again over the last 6 years over and over, Zai, we believe, we are innovative. We are pioneers in what we do. We respect other companies' strategies. But we think whatever feels Zai Lab the best, whatever feels the shareholders the best, we will do.

Okay. With that Samantha, Billy, Jonathan, Tao, I want to thank you guys so much for taking the time. And thank you so much for a productive session.

Thank you, Anupam.

Thank you, Anupam. Thanks, everybody.

Thank you, Jonathan.