Zai Lab Limited (ZLAB) Earnings Call Transcript & Summary

Thank you. Thank you, everyone, for joining this session at Goldman Sachs Global Healthcare Conference. This is Ziyi Chen, China heath care analyst at Goldman. So this session is for Zai Lab. So today, we are very pleased to have the Head of BD of Zai Lab, Jonathan Wang to join this session to discuss with us the most updated progress in BD and also the overall strategy of the Zai Lab. Thank you, Jonathan, for joining us.

Thank you, Ziyi. And thank you, Goldman Sachs. Yes.

Yes. We're going to start with some of the broad questions. I think in the past 6 months, we have seen major progress in the BD side. I think -- thanks to you and your teams great effort on getting all those assets in the past 6 months, we have seen 4 major deals coming in and 4 major assets coming in. So let's start with the first one, which is the recent one. I think your investor will be very interested to understand the progress you made on the KRAS G12C licensing from Mirati. So first of all, would you please elaborate a little bit more about the rationale to get that asset? And particularly, in China, what kind of commercial opportunity we'll be looking at for this asset?

Yes. Thanks for that question, Ziyi. First of all, we're very excited about this collaboration with Mirati. KRAS has been a very hot target and also with the recent approval with Amgen's assets, really certifies the importance of KRAS in not only lung cancer treatment but, more broadly, perhaps in some of the GI-related tumors. The Mirati compound, in our mind, has the potential to being best class. And also in China, there may be an opportunity where we can move pretty quickly given the Amgen product is still not approved. And also, it's not even in the clinic yet in China. But from a strategic perspective, if I take a step back, if we look at our Zai's portfolio, especially in lung, especially in the GI-related tumors, I think we have built a very strong position, a leadership position with multiple assets that could be synergistic with each other. So if we look at lung, not only do we have the I-O assets, the PD-1, PD-1 and LAG-3, the tumor treating field recently had very encouraging data in lung. But if we look at outside of therapy, precision medicine, we have a ROS1 with Turning Point and MET inhibitor. We also have the EGFR exon 20, which recently reported very encouraging data at the ASCO. And now with this KRAS, we have a very long and broad portfolio that can address different mutations, different patients, subpopulations. So really, we can create a lot of scale benefit, a lot of synergies, whether it's in development stage or in commercial stage. And so this KRAS really completes that puzzle in addition to the opportunity that we made, either combine with our in-house pipeline as well as potentially other pipeline assets that Mirati may explore on a global basis. So we're going to work with Mirati very closely. We're going to try to join as many of their global trials as possible, thereby trying to help them accelerate their time line. But also hopefully bring this asset in monotherapy, in combination therapies, quicker to patients in China. So it's really strategic on many levels, this collaboration.

Yes. Sure. Well, of course, it's going to be really strategically important to your lung cancer portfolio. But just one thing is that if we look at the prevalence rate of KRAS G12C in China compared to Western population, based on some of the recent data, well, it looks like, it happens to be a bit lower than in the Western population. What's your view on that if we're looking at the commercial potential and we are paying $65 million upfront, plus near $300 million milestone? So how you actually look at the commercial potential here in China?

Yes. That's a good observation. And based on literature, it does appear that the prevalence rate in China is lower than in the United States. So it's roughly about 4% or 5% of lung cancer and about 2% to 3% in colorectal. And however, I must caution that there has not been any clinical studies done in China. And because also there's no approved drugs on the market, the diagnosed rate is obviously -- could potentially be a lot lower than what actually there may be. So we could be one of the first KRAS to be put into clinical trials. Obviously, we'll know more from the study what the actual prevalence rate may be in China from our discussions with different KOLs. It does seem to be that there are a lot of patients with KRAS that could potentially join our trial and very quickly. So we'll find out more. But from a commercial perspective, it is still very large. I mean 4% or 5% of non-small cell lung cancer in China on an absolute basis, that is still a lot more than U.S. and Europe combined. So -- and then plus the colorectal patient population, it's still a pretty sizable commercial opportunity. And given the late-stage nature of this asset, given the potential to combine this with various other agents, given how hot KRAS is globally, we think it's a reasonable price to pay.

Got it. And also, I think investors might be interested to understand the clinical pathway here in China for that one because we do think that Mirati's asset, the KRAS G12C could potentially be the first one. Well, if -- well, not first, but like probably the first 3 to get to the market of the clinical pathway, clinical strategy is right. So any preliminary thoughts here? You're going to do a [ bridging ] study in China or join their global trials? What's going to be the most efficient way to do that?

Yes. So I think Mirati has -- if I remember correctly, guided or have stayed in public in the second half of this year, they will be filing the NDA in the U.S. for the late lines in monotherapy in lung cancer. So that's certainly -- if that is the case and given their breakthrough therapy designation, that would really help us to potentially accelerate the pathway in China. Now we just signed the deal. So we need to discuss more with Mirati. We also need to have more dialogues with the Chinese CDE NMPA. So until then, it is a bit too premature to really say what the regulatory pathway is. But if I look at other products that we have successfully put on to the market, there is a range of possibilities from potentially an accelerated approval, leveraging their global data and maybe some PK data to perhaps maybe conducting a bridging study. So there are various options in front of us. But regardless, this has breakthrough therapy designation in the U.S. and this obviously addresses a very large unmet medical need here in China. So we think that there may be a case for acceleration.

Got it. Got it. Well, just a small question on that is we read about the data coming from Mirati's assets, and we talked to some of the physicians. So some might show a big concern on the QT prolongation in a small percent of patients. So when you are doing all those due diligence on the asset, is that risen any flag to you?

Yes. So we've noted that as well. And we talked to many KOLs in the U.S. and also in China. Now first of all, the grade 3 or above QT prolongation is about 3%. And if we look at that number, there are actually quite a few other approved China therapy products on the market also with similar range of QT prolongation as a percentage of patients in their clinical trials. One example is Tagrisso. So Tagrisso has a QT prolongation 3, grade 3 or above, about 2.2%. That has certainly not stopped Tagrisso being a very strong drug also in the lung area. And when we talk to KOLs, they know that this is very manageable and it's short-lived. It's not sustaining. Based on the Mirati data, there is no arrhythmia currently observed, so we think it's a manageable issue. And then if I look more generally at the AE profile of the drug compared to Amgen's products currently approved, I mean, Amgen's product actually has a label warning with their interstitial lung disease, which had fatal cases. And from a treatment discontinuation rate, their's is about 9% versus the Mirati drug, which is about 7%. So looking at totality, look, I don't want to say which one is better based on safety. There are pros and cons with each, but we certainly believe that the QT prolongation is manageable based on other drugs and based on KOL comments specifically with adagrasib.

Got it. Well, that's really useful. Probably we can touch-up on another asset here in the pipeline. Well, it's probably not in the pipeline, but a new indication is for the tumor treating field, Optune. So we haven't seen really positive interim readout earlier this year in April. What should be -- or how should we look at the data? And what is going to potentially be the readout price from the positive development from lung cancer to other solid tumors that the tumor training field is targeting? Because I think we are going to have ovarian cancers, liver cancers, pancreatic cancers upcoming for data readout. So what's your read here?

Yes. We're certainly very excited by the recent developments with TTF, and I must also say that neither us nor Novocure has actually seen a data. This is from the DMC, and their recommendation to change a protocol has also been endorsed by the U.S. FDA as well. So we patiently await for that much shortened trial now and when that data probably comes out sometime next year. But that is certainly very exciting for lung cancer patients and for TTF as a franchise. To your point, there are many other important readouts coming up. The first one is probably going to be in liver cancer, which is going to probably sometime later this quarter, very soon, actually imminently. And then you're going to have ovarian cancer interim readout for that pivotal trial as well in the second half of this year. Our own gastric cancer should finish enrollment by the end of this year as well, like this local study in China. The important thing is now if this does work in lung and it's already approved in GBM obviously, as well as in mesothelioma, therefore, this has been approved outside of GBM now in the chest cavity first with mesothelioma and now, potentially, with non-small cell lung cancer. And then you look at in combination with the TTF's data in various other solid tumors in Phase II trials, for example in pancreatic, in ovarian cancer, all of them had actually shown a much longer PFS benefit potentially, at least empirically compared to the standard of care, then you're looking at a product that across different tumor types, in Phase II, in Phase III, all seems to be working. That gives you a much greater confidence in the potential of this product working in some of these other indications, which would have pivotal data readouts coming up. We believe this is very revolutionary. We think this is really a new modality, which is coming up that could be really truly a platform. And the unique thing about it, it's so safe that you can combine TTF almost with anything, with PD-1, with chemotherapy, et cetera. So we think it could be really a backbone therapy for many different types of all kind of patient populations as monotherapy or as combination therapy.

Got it. Got it. That's very interesting. Still, as we mentioned at the beginning of the session that Zai Lab to be really active this year on the BD side. So now we have a already a bit of very strong pipeline for lung cancer. And now we also have a pretty strong pipeline for gastric cancers. And historically, like with PARP inhibitors also with the Optune for ovarian cancer, we also have women cancers. So going forward, we're trying to understand a bit more about your BD strategy. What kind of areas, well, in oncology or outside oncology we'll be looking at, particularly, earlier this year, we did another round of financing. So I think Zai Lab now is sitting on a very strong cash position. So any new strategy you will bring up to the company? And any new areas you will be targeting?

Yes. Thanks for that question. Since the inception, for the last 6, 7 years, our BD strategy have always evolved as well. I think we have been -- under Samantha's leadership, we have really been a pioneer, being the sort of go to partner, the partner of choice for many of our Western companies. And initially, it's really about China market access, how to bring these products quicker to China. But that has really evolved more to about how we can work collaboratively like in the case of Mirati, like argenx, where we can help them accelerate some of their global trials, we can do some innovative trials ourselves in China. So -- and we're going to continue to evolve. I think there are 3 disease areas which we have really built a very strong presence in, namely in oncology. And within oncology, we have sort of a 4 or 5 disease strongholds like lung, like GI, like hematology, women's oncology and brain tumor, for example. And then now we have efgar, for example, and that, in itself, is a pipeline product opportunity. All of a sudden, we have a very strong presence in severe autoimmune diseases coupled with our own, obviously, IL-17. So in areas where we are strong in, we're going to continue to make them stronger, like in lung, like in GI with KRAS, with the columnar assay, et cetera. But then in other areas, like what we did with efgar, like what we did with the Regeneron 1979 asset, we can also very quickly, we have demonstrated ability to get something in an area which we haven't had presence before. But because of these type of anchor assets, very quickly, build our presence to demonstrate to our partners that we're capable of doing that. So there probably will be other areas outside of what we have historically been active in. We could build positions there too. And then beyond that, if I take a step back, the company's strategy is really to be a global biopharmaceutical company, focusing on innovation. So I think in addition to these regional rights, collaborations, a part of our BD strategy in every way would also be about how we can help the company accelerate its path to be a global important player. So I think we're always very open minded. It's not just licensing. We're open to a lot of creative deal structures. So let's see where that takes us. Our BD team is also getting stronger as well. I think we've been doing a lot of deals, as you mentioned, over the last 12 months. And our current BD pipeline looks promising as ever too. So we're very encouraged and excited about the future going forward.

Got it. Got it. Well on the BD side, we probably have a more broader question is we see increasing number of pharma companies or tech companies in China to get into the space, right? So everyone looking at global assets since there's a huge gap in China versus in the U.S. and Europe in terms of pipeline. So have you seen the competition actually is increasing and triggering some potentially higher price for someone with high-quality assets, and you are facing more intensive competition for some assets when you are looking for assets that can strengthen your pipeline? Or what will be some -- let's say, you're going to do a perfect pitch. What will be the key message you're going to deliver to potential partners to win the deals?

Yes. It's a good question. Look, it's -- there's no doubt that there's more companies in general. Given the capital, given the growing market, there's more companies whether to do discovery or to do licensing, that's sort of popping up here in China. You -- sort of first, let's look at the results. I think since we went public for the last 3 years, the deals that we've been doing, both the quantity as well as the quality, not only the quality of the asset but the quality of the partners is just increasing. And I think what's important is at Zai, we are very consistent. We consistently bring not 1, not 2, sometimes multiple good assets every single year and with different types of partners as well. So we may lose one deal. We may lose two. Why not? But so far, we really haven't. But we may lose one day, right? But at a sort of macro level, we have been very, very consistent as the go-to partner, the ideal partner. And why is that fundamentally? It's because we have a very strong team and this tremendous leadership across the entire spectrum of different functions for a pharmaceutical company from the sort of preclinical development stage. That's where we really can help the partner accelerate things, and we demonstrate we'll be able to do that. On the regulatory side, I think we're second to none. We've been able to do things where many people just haven't been able to being a pioneer in fact and even going faster than our original communications to Wall Street, to our partners. And on the commercial side, we are building a very strong team under William's leadership. That is about 700 to 800 people now and is doing quite well for the product that has been launched. So we have many success case stories and successful track records. Ultimately, it's about trust. We've been able to instill that trust in potential partners. We have been reinforcing these trusts in existing collaborations. For example, Turning Point, that is a collaboration we've been able to expand after just 6 months to go to a second asset. So I think we've just been very consistent, and we have been able to deliver on our promises. And in a country where even though the reform is progressing rapidly, it's still relatively new market to many companies. So the last thing they want is to really worry about China. They want a partner who can really help them excel. They don't want to worry about the data that's produced, whether it's incompliant, whether commercially, there's any issues. There could be a lot of things that can go wrong, right? So for the lead asset, for their best asset, they would want to put it in the right hands. And I think at Zai, we have demonstrated that. I think that is ultimately the most important aspect.

Got it. Got it. Well, one thing we have noticed that we are pushing forward some of the in-house discovered assets into clinical stage. So now we have CDC7, we have CD47. We've got [ COVID-19 0.2 ]. Those 2 assets are highlighted in AACR this year. And also we have IL-17, right? So I think every single year, we're probably going to see more assets moving. It's more like in-house developed. So within Zai Lab, how are you guys are going to balance the resources into finishing up BD, which is still contributing a lot by now and also the in-house discovery, which can potentially be more like future growth drivers. So how actually you're going to balance that? And in terms of picking the right target to -- for drug development -- for drug discovery and development, so what's the rationale of picking some of the targets? And what's the strategy behind it?

Yes. No. It's a good question. Look, I think it's actually more synergistic. The 2 really complements and helps each other. So certainly, when we look at our licensing opportunities, our early-stage team discovery preclinical team really helps us to look deeply into the preclinical profile of the different compounds molecules. And then similarly, because of our understanding of the disease pathways, for example, with the PARP inhibitor in sort of the DDR space with many precision medicines that we have in IL, we have in those spaces, we have better idea or more know-how in picking the right targets, in picking the right molecules in our own discovery efforts too. So I think they actually complement each other. And then from a resource perspective, I think for now, it's definitely still going to be more collaboration. We have 3 in-house programs that's currently in the clinic. We have over a dozen, actually much more than that through licensing that's in various stages of development or commercialization. I think over time, that shift may change a bit more. I don't know if it will ever be 50-50 or it may actually tip the other way. We don't have a specific goal. It's really when we look at whether in-house or licensing, we evaluate whether the compound has the potential to be globally sort of relevant, being globally first or best-in-class and have differentiation. If we think we can do that, then we'd probably do it ourselves. But if we think there are compounds like the Mirati, KRAS G12C that's looking very promising, very late stage, then we want to work with the best partners there. So I think it's really a case by case. We are taking a portfolio view approach to assembling our sort of diverse programs. But whatever we do, there obviously will have to be synergies as well. So likely, with our own discovery efforts, it will be areas that's sort of adjacent to or also similar to clinical programs already have.

Got it. Well, probably, we're going to switch gear for a bit down to the commercialization part because this is actually a rare capability that a biotech company with a relatively short history can actually do it, because in China now, we only feel there's a small bunch of biotech companies that can actually build a decent commercial infrastructure. So what about the commercial strategy now compared to some of the established pharma in China and also compared to multinational in China? I think PARP inhibitor, ZEJULA, is probably one of a good example, right? We're trying to hear more about that because you're already competing the number one oncology franchise from multinational players, which is Merck plus AstraZeneca. And their's upcoming is number one domestic oncology powerhouse. I mean, Huawei in China, also one of the big biotech companies, Beijing in the market. So you are really competing with those number ones in the market. So what is the -- how does the performance look like now? And how you guys actually differentiate yourself in the commercial side from those major competitors?

Yes. I think, first of all, we have been doing pretty well. I think we sort of -- in Hong Kong, we did very well, as you know. And then when we launched it in China earlier last year, we were under some handicap from any commercial infrastructure perspective, given Lynparza already on the NRDL. Lynparza is launched sort of, I think, 18 months or something like that ahead of us in Mainland China. So that gave them edge because we were on self-pay. Nevertheless, we did pretty decent, I think, in that first year of sell being handicapped. We were able to successfully get onto the NRDL at the end of last year to be eligible to a reimbursement from March of this year. And so far, what we're seeing is very encouraging. We were able to list the product onto a lot of hospitals. We were actually listed in the most number of hospitals compared to other oncology products that got NRDL reimbursed, so it's just really showing the execution of our team. Our team overall is about 700 to 800 people. So in a very short span of time we are able to, under William's leadership, to build a pretty sizable commercial team, and many of them come from very good backgrounds. Many of them launched several products, including Tagrisso and others with William when he was at the Head of Oncology at AstraZeneca. So I think the execution will see more of that. But I think, fundamentally, a lot of it is also due to the product itself. That's why we have a lot of pride in the pipeline that we have assembled. There is real differentiation in niraparib compared to other PARP inhibitors. It is the only PARP inhibitor that is approved and validated that can address all kind of patient population, that does not need a diagnostic test in the first-line setting. And we would be -- if the criteria are similar to last year, we should be eligible for an ideal reimbursement negotiation later this year, even for the first-line setting as well. But this product has both on efficacy, on safety, on convenience, a lot of differentiating factors compared to Lynparza and BeiGene [indiscernible] PARP inhibitor are still just approved in the third line in the gBRCA setting. So I think it's really the competition is between us and Lynparza, and we're pretty confident we can get many shares. And we have built a pretty good commercial team under William's leadership with the differentiating asset, so we're pretty confident.

Got it. So beyond oncology space, now you've got efgar, right, to enter into the autoimmune diseases area. So in China, one of the questions we always have is that we have been looking at the market for many years. Well, but still for most of the autoimmune drugs in like Humira, like Enbrel, they didn't do very well in China, right? So I'm trying to get your thoughts on that. Do you actually envision there's going to be an inflection point for the autoimmune market in China? So -- or what's going to be your strategy to get efgar into China, while some other autoimmune disease drugs might not be doing that well. So I try to understand a bit more about that strategy.

Sure. Sure. So first of all, historically, the TNF-alphas, for example, hasn't really done that well. There's probably a lot of legacy issues. And more recently, for example, Dupixent is actually doing not so bad. It's also addressing diseases, autoimmune diseases that address the large patient populations being more mild to moderate kind of diseases. When we picked efgar as really our anchor asset to go into this space, we did a lot of various KOL and experts, primary research. This product addresses many different types of severe autoimmune diseases. And many of them have very deadly consequences. And also many of these diseases, patients go see care at a very limited number of hospitals, highly concentration of them. And many -- by the way, still, even though gMG, for example, is actually on the rare disease list in China, there's still about over 200,000 patients. So it's not small by any means. But the features that are described relevant to efgar actually makes it more like an oncology product in that there's concentration, in that it can be very deadly, in that there's huge unmet medical need with very limited treatment options currently. And so consequently, we believe this is the perfect product to use to build around a commercial team that can be very similar to our oncology commercial team to really fully maximize the potential of efgar. And by the way, efgar is actually touching a lot of sort of hospital departments that we're already in. For example, in hematology, where this product is being developed in ITP and CIDP, also neurology for the leading case of gMG has some synergies with our Optune product as well because the hospitals where neurology is strong, Optune also is very strong. So there are synergies. There are relevance with oncology. It's very severe. I think if any product can succeed, this should be the one.

Got it. Got it. Well, a bit more also about the talents because I think as the better company in China now, you are building a full-fledged platform. So talent has definitely been very critical to you guys. So could you please update us on how many headcounts you have in the clinical team now, discovery team, commercial? You mentioned about 700 to 800, right? So -- and also, how do you feel like the competition for the talents now in the China market? We understand there are numerous new biotechs emerge, right? They're also competing for those talents. They're one level above some of the entry-level staffs. So what's your take on that?

Yes. So first of all, on the people side, we have actually about 1,400, maybe approaching 1,500 FTEs. Obviously, we have presence in the U.S., on both the East and West Coast, but the vast majority of those people are still in Mainland China. And then if I split between the major functions, commercial is about 700 to 800. The clinical development operation team is probably around about 500 and maybe a bit more than that now. And the various other functions like manufacturers as well, we have some people there. So we have been good at attracting talent. We have been doing a great job in trying to retain talent. I'm sure a lot of people or other companies want to steal some of our people away from us. But I think under Samantha's leadership, on the sort of financial incentive side, pretty much the majority of our employees have equity ownership in the company and are well compensated. But more importantly, I think as we have really built a culture around sort of the U.S. biotech kind of culture, really results driven execution oriented. So people really do a sense of achievement and getting things done. And then also very importantly, we have a great pipeline. I think whether it's the development colleagues, whether it's the commercial sales team, they all want to work with differentiated product. They want to work with good programs. So I think it's really a reinforcing kind of cyclical positive circle that sort of -- you have good product. They attract good people. When the good people are happy, and then they are able to, whether discovery or in partnership, bring more better products. So that's why actually the turnover rate at Zai I think is probably the lowest in the industry despite the fact that probably many people want to, as I mentioned, grab a lot of talent from Zai. But we've been able to reach paying. We've been able to continue to attract and even attract, as you saw in some of these recent announcements, some of these global leading people like Alan Sandler who was head of oncology for solid tumors at Genentech globally. So we'll continue to build our presence both in China, in our infrastructure as well as the U.S. with the ultimate ambition of being a global company that is primarily based in China.

Got it. Well, since you already mentioned about the talent recruitment in the U.S. and also the global part of the -- of your story, so lastly, we would like to touch upon on your global strategy, right? So now you've got in-house projects and also you got potential ambition to get some of the global rights for some potential future assets. And how you will look at the global strategy play out for Zai Lab as a company. Now you're pretty much bringing everything in the pipeline licensing model, right? In the future, in terms of the resource allocation, in terms of the talent recruitment, in terms of the assets, how the global strategy will be like?

Yes. So it takes different stages and phases, I think, first of all. At Zai, we've always been operating at a very fast pace and speed. So I think you may have seen in our corporate deck, there's like -- every 3 years, there's a significant evolution in the company's trajectory. So we are hoping in the next 3 years, we will be a much stronger company from a global perspective. And we've been sort of going on that trajectory step by step. First, the inclusion of very strong talent, both globally as well as still continuously here in China. So talent is very important. And then the pipeline, how through -- now we have -- from a discovery from our in-house efforts, we have assets with global rights, and we're going to continue to advance those and bring other preclinical assets to the clinic. And then we're going to also try to sort of boost those efforts obviously with business development to also have global rights programs, both inorganically as well as organically. So I think all of these are going to happen. At the same time, we're also, obviously, going to take advantage of the fact that being a China-based global company, there are certain diseases, certain indications where we may have an advantage to develop for the world in sort of solid tumors, in sort of, for example, infectious diseases, in autoimmune type diseases, which, as you know, are very prevalent here in China. So I think there are many angles that we're doing, and we've taken a lot of different approaches. But the vision and the mission is very clear. We want to be a global company. We want to be a company like Takeda, Daiichi Sankyo because we -- there's a very strong tailwind here, and we want to take advantage of that. But also, very importantly, we want to build this leadership position in China and bring good therapies to Chinese patients. And then hopefully, very soon, we can do that for the global patient population as well.

Great. I think our time is up, and thank you very much, Jonathan, for your sharing. And we're definitely looking forward to more deals, more clinical progress readouts from Zai Lab. Looking forward to that. Thank you.

Thank you. It is always a pleasure talking with you, Ziyi. Thank you.

Yes. Thank you. Thank you, Jonathan.

Bye-bye.