Zai Lab Limited (ZLAB) Earnings Call Transcript & Summary

Thank you very much for joining us.

Thanks for having.

To start away, this is pretty much halfway into 2024. And could you tell us about what has been the key focus of Zai Lab this year, particularly looking into second half of the year? Commercially, clinically, anything we are pretty much focusing on for the rest of 6 to 12 months?

Yes, it's been already a very eventful year, and it's an exciting year for us. This is the first year of our growth period that we talked about. We've rolled out last year at this time. We said between -- I mean, the years that encompass '24 through '28, so that 5-year period, we said we'd grow sales at a minimum compound annual growth rate of 50%. We'd achieved profitability in that period and move from having 4 products on the market in China to up to 15 or so. So this is the first year of that. And so what we're seeing so far is the big focus commercially is to launch VYVGART. Well, we had VYVGART approved for gMG last year, right about at this time. We had commercial product in the market in September of 2023 but then had NRDL listing for VYVGART for gMG January 1 of this year. So that's the #1, I think, big event for us in 2024, is to launch, VYVGART really well, and I can talk about how well that's going. And I think it is. The second part was then to continue to grow the base business. So the 4 other products other than VYVGART and what we've said is we'll grow those products this year, ZEJULA being the biggest at a rate comparable to last year, so between 20% and 25% sales growth. And the biggest driver there will be ZEJULA continuing to gain share in the PARP class in ovarian cancer. We are the market share leader. We want to continue to do that, and I think we are. We have 2 other approvals that have already happened this year. So we'll be focused on launching those drugs the second half of the year, and that's repotrectinib, our ROS1 inhibitor in partnership with Bristol Myers, originally was turning point. And then XACDURO or SUL-DUR which is an antibiotic for hospital-based ABC infections, and we also will launch that in the second half of this year. So -- so 3 big launches were -- 1 really big launch in VYVGART. We're focused on 2 new launches that will come second half of the year and then really driving operational performance across the portfolio. We saw really good growth in Q1 and I think good investor feedback so far and how we've started the year. We'll look to continue that kind of performance throughout the year.

Yes. For the VYVGART, I think everyone being super excited about the launch, company talking about USD 70 million for the first year in China. And when I talk to investors, clearly, everyone is expecting it's going to beat that number. Tell us a bit more about how well you have been executing on the commercialization part in terms of the team set up, in terms of the penetration and hospital coverage, those health care practitioners coverage?

Sure. Yes. So in China, we say there's about 170,000 patients with gMG. And when we look at those 170,000 patients, they -- about 80% of them seek treatment at 1 of 1,000 hospitals. So it's pretty concentrated for China. So we're focused on 1,000 institutions that again cover like 80% of that opportunity. I mentioned we got NRDL listing in January of this year, at about $800 per vial U.S. price. So that equates to about $32,000 annual price per year. We were -- we'd love that price to be higher. But I think within the balance of what's reasonable in China from a historical precedent perspective, we thought this was at the high end. And I think it was at the high end of what most investors expected. So we have a good pricing environment, pretty concentrated prescriber or institution base. So we know where the patients are, we know where the prescribers are. So what we've focused on this year so far, is getting those 1,000 hospitals to take the NRDL listing and pull it down to their local formularies and to get the physicians in those institutions to try VYVGART and really to what we've -- physician is to try it with their more acute patients or the patients who historically haven't responded well to existing therapies. So that they have a good initial experience with VYVGART, start to get comfort using it and then try it again. So what we know so far, what we've said at least as of the end of the first quarter, and these trends continue is we've had about 1,000 physicians prescribe VYVGART. We're seeing -- what we said in the first quarter is we had about 2,700 new patients start on VYVGART. That was on top of 1,000 new patients who started in Q4. In Q2, we continue to see that kind of 1,000 new patients per month volume continue to accrue. And what we're seeing, as I say, about 1,000 physicians have already prescribed, more than 1/3 of those physicians have already then tried it with a second patient. So we're getting initial trial, which is good in the launch, move towards adoption, which is tried on multiple patients and have good experiences. So far, we said we would sell over $70 million per year. I mean, this year -- and that was just based -- we said that -- we said that on our year-end call and really what we were looking at there was I think analyst models were in the $40 million or so range. We have not historically given product level guidance. So I guess, no, we don't want to give product level guidance and not be able to achieve it. So I think to your earlier point, we feel quite confident about the trends towards $70 million dollars and above. And I think if we continue to see what we're seeing so far, which is something like 1,000 new patients per month come in. We will get the benefit then of those patients taking multiple cycles through the year. Of course, the ones who start in January, you're going to get a good effect for those who start later in the year, we won't get quite so much. But I think we're quite confident that we're trending towards somewhere above $70 million for the first year. What does that mean in total? I think we'd be happy if we are able to get over 10,000 patients started on VYVGART this year and that they're starting to get the benefits of multiple cycles. In other words, I think that sets us up really well for the rest of the life cycle for gMG at least. And I think there's no reason to not believe that 170,000 patients, about 150,000 of them are on label. So [ serum ] positive, right? There's no reason that all of those patients at some point in their disease course couldn't benefit from VYVGART. But we're starting today with those who are more acute and let physicians get experience...

So [indiscernible] they can afford it.

Well, then yes, the affordability piece, of course, is it is on NRDL. So there's the benefit there. And then as you know, very well, it comes then down to individual, what other kinds of insurance do you have in terms of the out-of-pocket fees and otherwise. And we're quite sensitive to that. We sell Optune, which is not covered through NRDL. So we understand sort of the patient dynamics and otherwise. So we'll have plenty of programs there. To your question about resourcing, we started with 100 sales reps. I mean, again, this is a pretty concentrated opportunity. We started with 100 sales reps last year. We moved to 150 as we got NRDL listing. And I think what we're seeing is the opportunity is big enough that we want to make sure we're fully saturating the opportunity here in terms of medical education, otherwise. So we're headed to about to 200 sales reps. And I think 200 is probably the right long-term number for gMG. Again, I think I'd say relative to other opportunities in China, that's super-efficient. And this will be a big driver of our long-term profitability.

Got it. Then other than gMG, of course, that's the first indication, then we're going to have multiple more indication, outcome down, right? What's the next plan? Next one is going to be CIDP? And in terms of commercial preparation for that in terms of the regulatory communication and also in terms of the pricing, how should we think about the future trend?

Yes. So I think for CIDP, first, we had the submission accepted in last month. So using normal time frames, I think we should expect an approval, the first half of next year, for sure, the data is very compelling in CIDP and it was compelling in the Chinese portion of the Phase III trial. Relative to, I mentioned 170,000 patients with gMG in China. At CIDP, it's more like 50,000, but -- it's a more chronic disease. I mean the drug utilization would be higher in CIDP and there are fewer alternatives to use today in the Western markets, IVIg is a good foundational -- or reasonable foundational therapy. IVIg products are not approved on NRDL for CIDP in China. And as you know, not consistently available anyway. So I think the need for patients with CIDP for a drug like VYVGART is pretty compelling. So you can do scenarios, I guess, when you think about the opportunity that even though they're only about 1/3 of the patients, the market opportunities could be as big because of the compelling need and the fact that patients will probably take more drug over time. Pricing, our view is gMG was priced -- I mentioned -- $800 per vial is the sort of foundational price. Our goal is to push that kind of price for CIDP, when we have the chance to negotiate for NRDL. So if we get approval in the first half of 2025 for CIDP, this would be a 2026 NRDL introduction. And again, our view would be the reference -- the best reference price for negotiation will be gMG IV.

Got it. Well, I think on the pricing side, there have been a lot of discussion and debate on the China's pricing environment of drugs. Particularly for Zai Lab, company have a very good pipeline and portfolio of high-quality assets, but how we're going to commercialize that generate decent returns, has always been one of the key debates among investors. Currently, I think we got at the ZEJULA. We have Optune. We have VYVGART, it's all different models different therapeutic areas, right. And even the price in point is different. So how should we think about that? And after running Zai Lab for a couple of years, how do you feel like the pricing environment in China to be sustainable for companies who like to have to make decent profit at decent returns?

Right. Well, I'll spend a couple of minutes on this because I think it's important. First, I think if you look at ZEJULA, so that's a product -- it's our biggest product today. It's one that's been on the market the longest and we have the most experience with. Now I think ovarian cancer patients who are eligible for PARPs, the universe is about 50,000 patients. I just put that number, think of that relative to VYVGART. We're competing directly head-to-head against AstraZeneca, Merck, BeiGene, [indiscernible], I mean this is a super competitive market. So we've got in the range of about 400 sales reps marketing this against 400 sales reps from AZ, Merck and so on. It's a quite profitable product for us today. So even given those dynamics of smaller patient base, very competitive, resource pretty intensely, we go after about 2,000 -- between 2,000 and 3,000 institutions. By that, I mean, take the sales and all of the sales and marketing costs, we're making money, and we're making good money. And that will get -- that will grow over time. But that's a tough model. I mean, again, that's -- those are 4 of the best companies in China to compete against, I think. If we think of VYVGART, we have really no competition for a few years, 200 sales reps, 170,000 patients and better pricing. ZEJULA is, I think, in the range of somewhere under $20,000 a year for a standard patient. So you've got higher pricing there. So the VYVGART model is great, okay? And I think what we see -- what -- I guess what I've seen over a few years is, we'd love more VYVGARTs, but you can do really well with ZEJULA. So I think if you've got a product that is delivering compelling benefits to patients in a well-defined area. We like the model where these are patients that are going to, whether it's 1,000, 2,000 or 3,000 touch points for care, as opposed to 100,000 or something. So I think that model works well for us. I think if we can achieve pricing for any of the products in China that are in the range of 15% or higher of what the U.S. net price is. I think that model can work for us. That model works great for VYVGART. I think what we see in the pricing environment overall, though, at least for the things that I'm referencing here is it's been incrementally positive over the last few years. I think the developments have been good. I think starting with the move to simplified renewal and more transparency in pricing and how pricing gets established over time and what kind of price reductions you can anticipate and project on an every 2-year basis. The move to make that more of an algorithmic approach, I think, is really good and I think matches well other experiences I've had in markets like Japan and others where you know the price isn't going to get better, but you can predict what it looks like and can support a lot of investment. I think the price that we ended up with, with VYVGART was really good. And I think it -- and we were, I think, in the negotiations, we presented the [indiscernible] we didn't try to undersell that, this is a very rare price of $800 was work we said there are 150,000 patients who could benefit from this drug in China, look at the compelling clinical benefit and otherwise. And I think we were pleased with the price that we came out with. And I think we think that's going to be manageable over time. So I think there are lots of things that on a global basis, investors get concerned about with China and otherwise. But I think on the ground, pricing to me feels pretty good and certainly better than it did in 2021 or I think -- I think investors certainly I think the experience with PD-1s and how that price -- we haven't seen that kind of -- seen that kind of pressure in the classes we're in. And certainly, I think the experience in the last year has been good.

VYVGART currently, if we look at the first quarter numbers in the range of gross margin, 60%, 65% of that kind of range. Is that kind of the margin we're talking about over the next few years or we're going to see major room for improvement?

Well, I think first, if you look at the -- we don't break out product gross margin, but as you mentioned, our total gross margins in that range, we have said that VYVGART is a little bit less than our corporate average. That will improve over time, though. So we -- in all of our arrangements with Western biotech and this includes Argenx. We have the right to tech transfer and manufacture product locally. We do that for ZEJULA, for example, for VYVGART, I don't think that makes sense. I mean we're a big volume driver for that product. So we're buying product from Argenx at cost. They've got a huge and really good plan to drive cost reductions in their manufacturing process, mostly driven by scale to move from 5,000 liter production facilities to 20,000. That will start to kick in for them in later this year or early '25 for us, we'll probably start to see the benefit of that in 2026 as we get that process approved for China. But we expect to see step change improvement in gross margin. So I think a long way of answering your question, sort of getting to -- or maybe a little bit better over the -- overall for VYVGART. There are going to be other products that are higher. But again, this is a -- it's a relatively high-cost product to manufacture. We have a really good price, but it's nothing like the price that I think Argenx gross margin is probably in the 90%, 91% or something like that. We're not going to get there Okay.

Got it. Well, on the commercial team because recently, they have made some change of commercial leaderships, right? Could you tell us a bit more about Andrew, the new leader on the commercial and why Zai Lab picking him to become a new leader for the franchise and what's going to potentially the impact to the commercial strategy going forward?

I think it was a great time to bring in a leader like Andrew, who's got a broader -- so if you look at where we've been, right. So ZEJULA, until this year was really the big driver for our sales performance, and we're quite proud of how our commercial team did and our commercial leadership did to position us well as the market share leader in ovarian cancer in China, which I think is the only market in the world where ZEJULA is the leader versus LYNPARZA. So I think quite pleased and proud of that performance. But if you look at where we're headed, moving from a sort of a ZEJULA predominant team to something that's going to encompass VYVGART and KarXT and bemarituzumab, so lots of different drugs and different therapeutic areas, having a commercial leader who's got experience across a broad range of therapeutic areas that's got experience managing a broader portfolio and focusing on not just really good launches but profitability. And I think we certainly need to -- we can't rely just on VYVGART to drive our profitability or just VYVGART and ZEJULA, all of these products need to contribute to our operating margin. So Andrew's experience both at Big Pharma, but also then more recently at a focused China company has been on broader portfolio management has demonstrated really good results in terms of not just top line, but bottom-line management, resource allocation and otherwise. I think also as we think about the next generation of growth at Zai, what are the next group of products to bring in, how do we think about the really big VYVGART opportunities versus the more targeted ROS1 products as well. I think the marketing experience that Andrew has had over his career, product planning and otherwise, I think are going to be increasingly important to us. So that was the leadership team. I think the basics of -- for example, with ZEJULA, having a new perspective is always good. Like that's good in every job, every business and everything else. So I have somebody to come into a team that's doing really well and has done well and look and say, "Hey, this is great, but have we thought of this? So I think we'll see some tweaks in sort of the marketing approach for ZEJULA or for any of our existing products. But I think we're -- and just to be clear on VYVGART -- we hired a guy named Will Chen, to launch that product. He is still the brand leader. He reports to Andrew. He's off to a great start, but to have somebody come in and just have a fresh perspective, that's good no matter what. But I think it's the broader portfolio management, it's the ability to manage both top line and bottom line and ability to think strategically from a new product planning perspective or all things that I think Andrew brings that I'm really excited that he joined.

Got it. Well, let's touch a bit on the small cell lung cancer -- non-small cell lung cancer franchise. Optune, just another product that has been trickled a lot of up and downs. What about the status of the filing based on the LUNAR study, China regulatory discussions. Any feedback from the regulators in terms of how we're going to proceed going forward?

Yes. So we've -- I think we've been pretty clear in saying we know that based on our discussions with Chinese regulators, they were going to certainly look to what the FDA thinks, views and sort of assesses on this product. So in some cases, we're going to -- we're in a partnership, we're going to be able to submit simultaneously. It's a global submission here, we deliberately wanted to wait until NovoCure got pretty far into the FDA review process. That has happened. So we've said we're going to submit our application in China this year. We're in the process of incorporating the various feedback and other things from FDA into our submission program. So we -- if everything goes well, we'd expect an approval in 2025. And I think from what we know, it's an approvable package. It's hit the endpoint on overall survival, very compelling data in one subset of that trial. Feedback so far, I think, again, it should be -- you never know until you get into the full review and everything else. But I think from what we know, it's -- I think the data is good and compelling and hopefully leads to a relatively straightforward China review process. Now the question then is what's the opportunity, and I do think in China, what we hear from -- now not regulators, but thought leaders and prescribing physicians is there is a big need in the second-line setting in lung cancer for another option. And if you look in LUNAR, where the data was most compelling, it was in second-line setting, of course, that was the trial. But in combination with the checkpoint inhibitor, the debate in the U.S. has been they're not -- that's not very relevant because almost all patients with non-small cell lung cancer get a checkpoint inhibitor in first line. So second line, you're looking for other kinds of opportunities. In China, that's not the case, right? I mean more than 50% of patients in the first-line setting are getting something like Tagrisso or -- and they're not getting a checkpoint inhibitor. So physicians are saying, "Hey, there's an option that's got good safety and it's combinable with a checkpoint inhibitor. That's something we're interested in trying. So I think we're cautiously optimistic on the review process. And I say that only because it has been a controversial piece, and we are -- we need to see how the FDA weighs in, but we'll get that submitted this year. And again, I think be ready to go and launch in 2025, provided the review process goes well.

Got it. We're looking forward to that. And another part of the business is really on internal R&D. I think in the past few years, Zai Lab is really putting a lot of efforts trying to developing your in-house pipeline. So is there anything that we can looking forward to over the next 6 to 12 months? In terms of the research team status, how the team has been doing and size of the team, what they are really working on because there are so many different directions you can pursue in.

I'll go in sort of backwards order from where the pipeline is and end up in our discovery team and what they're working on. But our most advanced global asset is IL-17 nanobody. So it's a topical formulation for mild to moderate psoriasis. We just started a global Phase II program. We're quite excited about this opportunity. I mean, we still have to generate the data. But if you can achieve PASI 75, 90. PASI 90 scores that are like what you see with the systemic injectable biologics through this topical that doesn't have a systemic side effect profile, we think it can open the market up in a real way for a step change in efficacy for patients with mild to moderate psoriasis. We're doing the dose finding work in Phase II now. So I think by the end of next year, we'll have data that's tells us whether or not there's a big opportunity here. And again, we're cautiously optimistic. That is a drug that we've developed in-house from the beginning. We have 2 oncology products in Phase I development. The one that I think is most exciting given the developments in the field is our DLL3 ADC, which we're studying for small cell lung cancer and other tumors that overexpress DLL3. Again, we know this is a validated target. Obviously, an approved bispecific now. This is a product we licensed in from MediLink last year, so a China-based biotech. But we think this has got a real opportunity to differentiate versus the approved bispecific in that I think it can be safer, could be combinable with PD-1s. And I think that gives us a really exciting opportunity. We're early in development. It's attempting to see a few patients and get super excited, but that's where we are. We're starting to see patient responses, and I think this is a product that could move very fast if the data continues to bear out, and this would be a global opportunity, not just for China, but for the U.S. and beyond. We also have a CCR8 that's in development for solid tumors, again, I think based on data it could be quite compelling. We -- so then if you move back to research, we hired Peter Huang, about a year -- about 2 years ago, to lead our discovery organization. We had a research facility in Menlo Park, California, that probably wasn't fit for purpose. So we closed that and opened a lab in San Diego to complement our labs in Shanghai. So we've got labs now in Shanghai, Suzhou and San Diego. Peter's background is he is a small -- he's a chemist worked on small -- worked at Pfizer and Zentalis. So he's worked on a lot of the small molecule oncology targets over the -- over his long career. So we've got a heavy emphasis on that in discovery and though. But I think really mechanistically sort of agnostic. So we've got programs -- preclinical programs in oncology and immunology focused in small molecule, basic antibody and ADCs. I think we have capability across there. Our investment is not big. We're not going to generate 5, 6, 10 and INDs a year. Our goal is to have 2 per year. And I would say that if you look at the preclinical programs and work that's happening now, we're on track for 1 this year, by the end of this year and probably ramp up to 2 per year in the next few years. So that keeps our investment relatively modest, I would say the investment in the researchers themselves to the biologists, translational medicine and so on are in the tens of millions of dollars. And then of course, we'd like to spend a lot more to take those programs through clinical development and otherwise. And our goal will be to bring things into the clinic that have some hypothesis on either being first or best in class. We're not looking for the third, fourth or fifth to market product in China. The emphasis we have in discovery is for products that can compete on a global scale. And I think we'll have that hypothesis when we declare a candidate and we move something into Phase I. And if we don't see the data that sort of gives us a belief that this could be a best-in-class type of opportunity, we will stop. And we've done that over the course of the last couple of years. I mean, since I've been involved, we've terminated some programs just because the molecules were okay, but they weren't -- we couldn't really differentiate. I think we're quite excited, and more to come there. I mean we'll talk about the targets themselves as we declare candidates and move into Phase I.

Well, Zai have been used to known for licensing [indiscernible] good assets from the global partners. But now we're building the in-house capability. And in the past 2 years, we can see that actually the licensing phase has been slowing down a little bit right. So in terms of how we think about the capital allocation, where we're going to spend more money, internal R&D, still be more aggressive or more open-minded about selecting some more asset from the global partners? Or some other things you want to do. So how should we think about the capital allocation?

Yes. I think as it relates to partner -- what we -- what our bread and butter has been historically, so bringing in really compelling derisk assets into China. We still want to do that, but it's a high bar right now because, I mean, if you look, we've got -- again, all the things I've talked about on VYVGART , bemarituzumab, KarXT. So for us to bring in the next product, we wanted to either bring margin opportunity immediately and TIVDAK is one of those and 1 of the deals we've done more recently, and that's for cervical cancer I think, a pretty good commercial opportunity, but a great opportunity from a profit perspective because we'll launch that right through our ZEJULA sales rep, and it's the same physician treats cervical cancer, treat ovarian cancer. We'd love to find the next VYVGART, so would everybody else, right? I mean -- and they're not that many. But I think it either has to be like a $500 to $1 billion stand-alone franchise opportunity that we think has got good pricing and dynamics. Or something that immediately complements what we're doing today. So I think by design, you're seeing fewer deals because we have a very, very high bar. But we still -- I would -- I'd be disappointed if at this time next year, I'm not talking about some other great late-phase assets that we brought into China. But we don't need to -- we can afford to say no to a lot of things and we have. I think on the global side, there are good opportunities for late preclinical, early clinical best-in-class or first-in-class types of technologies in oncology and immunology, where we have a really good global ability to develop products and to source them and make decisions. So I think we expect probably another ADC program from us to come out of whether it's China or somewhere here in the U.S. And I'd love to find and I think there's a lot of really good developments in immunology. And I think we can -- we've got great insights now because we participate with Argenx in every program that they're developing. So I think our insights, our ability to look at some very early data and make up that -- our -- we're world class there, I think. So I think we'll see something there. And -- but I would love the problem of these programs coming out of research or DLL3 to have -- the best way to create value is to have an internally discovered or program that you've got global rights on with very limited obligations. Those are the things we want to move fast. So I think, again, I would say the one that to me, keep your eye on is DLL3 because we know if the data is compelling, we can move faster, there's a huge unmet need in small cell lung cancer, and we'll put the kind of resources behind that. And again, we have very little to -- back to MediLink in terms of royalties or anything from there.

Last question, also related to resources because in the past few quarters, I think Zai Lab has been managing the cash burn very efficiently. I think now there has been fewer debates about whether you can really make it to 2025. So what about the cash runway now? And how should we think about the cash funding environment in China when Zai Lab is talking about strengthening the in-house pipeline, talking about potentially next year, we're going to talk in something new licensing deals, then how should we think about the cash?

Yes. So we closed Q1 with $750 million in cash. And I think if you play out our quarterly burn to get to profitability in '25, we've got plenty of cash to fully invest behind the launches we need to invest behind to fully invest in the development of the programs that I've mentioned. And to do the kind of business development that we have historically done, which are pretty capital-light upfront types of things, right? We haven't been putting triple-digit millions into acquisitions. It's been $10 million, $20 million, then we step into the risk through development. So I think we're pretty confident that, that $750 million gives us plenty of cash and cushion to get us through the end of '25. And then in '26 and beyond, we start to generate pretty significant cash as the portfolio continues to expand and otherwise. Sure. I mean if the opportunity was there to raise money at a good price and everything, we would do that. So we don't have to wake up in the morning sort of figuring out how to get the next $100 million, $200 million, $300 million. So I think we're pleased with where we are. We don't feel any constraints, I think, around investing in the programs. And if we saw something that took us out of that range or comfort zone or whatever it is, we know your team and others are ready to help there. And I think we do have access to -- we could raise if we needed to. We have access to lots of various ways to raise money in China or in the U.S., but we don't need to. And I think that's privileged position to be in for a company in 2024.

Great. Okay. With that, we're going to close the session. Thank you.

Okay, great. Thank you.