As the losses dwindle, is Zai Lab finally finding its winning formula? (undefined: ZLAB)


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Zai Laboratory (NASDAQ: ZLAB), like many pharma start-ups in China, got its start by licensing proven drugs from other companies. Investors had high hopes that he would later turn into a full-fledged innovator, but the nerves as the company’s revenues soared while losses continued to mount.

The company’s latest quarterly results, released last week, show that Zai Laboratory ltd. (9688.HK) could indeed take steps towards becoming a laboratory for lucrative new treatments.

The company reported its first-quarter revenue jumped 129% to $46.7 million while its loss shrunk 65% from $233 million to $82.39 million, breaking a worrying pattern of revenue and losses increasing in tandem.

Nasdaq-listed and Hong Kong-listed Zai Lab has so far relied on providing a stable of established drugs for sale in China, primarily for cancer, that generate a healthy revenue stream but incur fees. high license fees, which squeezes margins. Since its launch in 2014, the company has aimed to transition over time to a hybrid model combining in-licensed drugs with independently developed drugs.

A review of the company’s results reveals that the balance between spending on drug licensing and investing in new products is shifting in favor of innovation, although overall R&D spending has fallen.

Zai Lab’s R&D spending fell 74% from $204 million in the same quarter last year to nearly $54 million, mainly because the company made no prepayments for research contracts. Licence.

Excluding the licensing factor, the company’s R&D spending increased by 30%, with most going to ongoing or newly launched late-stage clinical trials, as well as hiring more research staff to strengthen their capacity to innovate.

The prices of flagship products fall

Investors have long worried about its reliance on revenue from its licensed lineup: The company’s four main commercial therapies – Zejula, Optune, Qinlock and Nuzyra – are all licensed and earn big.

Its flagship ovarian cancer drug, Zejula, brought in nearly $30 million in the quarter, up 135% and accounting for just over 63% of total revenue. Optune, an electric field therapy for cancer, brought in nearly $13 million in the quarter, up 80% year-over-year. And Qinlock, for gastrointestinal tumors, saw its revenue increase sevenfold to $3 million. Another drug launched in December to treat bacterial pneumonia, Nuzyra, made $700,000 in revenue over the three months.

The company went public on the Nasdaq just four years after launch, on the back of the licensing business model. It moved to market much faster than most other still loss-making peers. In the three years since its US stock debut, the share price has tripled and the company was also listed on the Hong Kong Stock Exchange in September 2020.

But the downsides of its business model soon became apparent. Despite the increase in income, losses kept mounting and investors began to lose patience.

A major factor has been high licensing prepayments, which amounted to $108 million in 2020 and $384 million last year, accounting for 67% of total R&D spending.

And when Zejula was added to China’s national list of reimbursed drugs, it was guaranteed a distribution channel but at a reduced price. With drug prices falling but licensing costs still high, Zai Lab’s margin was squeezed.

And on the stock market, its stock price plummeted. It fell to HK$24.9 on the day of the quarterly earnings announcement, down more than 80% from a high of HK$150 in January last year.

When this published last year’s financial statements in March this year, the company was already downplaying the licensing part of its business as just a short-term strategy as it worked to develop its own drugs.

Creating your own drugs will take time

In fact, the company has 11 products in the pipeline, including its psoriasis drug ZL-1102, which is further along in the development process than the others, with Phase 2 clinical trials due to begin later this year.

Thus, Zai Lab’s own-brand drugs are still in their infancy, with reliance on its standard products likely to continue for now. The company estimates that more than 15 products will hit the market by 2025, boosting its profits. Adding its $1.31 billion in cash and cash equivalents, it should have enough cash to support more independent R&D.

However, investors continue to have doubts, despite the announcement of a lower loss.

Its stock price fell nearly 20% the day after the earnings release, but rebounded 18% on Monday when analysts were more optimistic about the potential of the product pipeline.

JPMorgan revised down its estimated loss per share from $6.87 to $3.88 for this year and from $3.55 to $1.1 for next year, while giving an “overweight” rating with a target price of HK$90, implying the stock price is more than double.

Merrill Lynch noted that product development is progressing steadily, although spending could increase in the short term as the company bolsters its go-to-market team, and the Shanghai lockdown could also weigh on sales. It retained its “overweight” rating while adjusting the target price from HK$77.5 per share to HK$65.5.

Zai Lab’s price-to-sales (P/S) ratio is around 18 times compared to 14.4 times for BeiGene, a close competitor which also relies on the licensing model, indicating that the market could place more bets on Zai Lab to find the winning formula.

Society clearly faces a challenge to wean itself off costly addiction to drugs developed by other biotechs.

But if Zai Lab manages to find the right remedy for its balance sheet problems and succeeds in becoming a biopharmaceutical innovator, it could eventually give investors that long-awaited dose of profits.

Disclosure: Nothing

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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